The 'stimulus' as psychotherapy

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Ten years ago, the last time this non-economic city -- it makes laws and news and not much else -- was speaking solemnly about the need for a "stimulus package," Sen. Bob Kerrey, the rarely solemn Nebraska Democrat who was then dating actress Debra Winger, said she was his stimulus package. The economic sort of stimulus package is almost always a mistake unless it is misnamed.

Unless, that is, its primary purpose is, as with the proposal the president made yesterday, long-term structural change, not changes in short-term conditions. This is because there is almost always a long lag between Congress's doing what it can do -- change fiscal policy -- and the effects of its doing so. And the effects often are not those intended, circumstances having changed by the time the new structure of incentives begins influencing consumer and corporate decisions.

Monetary policy, which fortunately is beyond the reach of the political branches, can have short-term effects. But not today, because Alan Greenspan's bandoleer is running out of bullets: After 11 interest-rate cuts in 2001 and one last year, rates are at a 40-year low.

However, low rates are a mighty stimulus that has been working for months. They are one reason the housing market remains strong. And three-quarters of new mortgages are refinancings, which mean, on average, an increase of $200 a month in the refinancer's disposable income.

Low rates are one reason why consumption, the economy's engine (about two-thirds of GDP), has not been paralyzed by consumer debt that, relative to disposable income, has been trending upward for many years. Because of low rates, consumer debt payments are no higher, relative to income, than they were 20 years ago.

When critics say the plan the president proposed yesterday will have negligible short-term stimulative effects, the right responses are: Of course. And: Good. Good because government is too blunt an instrument for fine-tuning an industrial economy.

The original idea of a $300 billion stimulus dribbled out over 10 years -- to spur a $10.5 trillion economy with $30 billion increments -- was even more derisory than 10-year economic projections generally are. Even the proposed 10-year, $674 billion stimulus is modest relative to the economy.

The president's proposed tax cuts have provoked the usual jejune rhetoric about favoring "the rich." However, any significant cut, meaning any cut large enough to prod this enormous economy, must be largely a cut for the rich, because only they pay significant taxes. In 2000 the highest income among America's second-richest quintile of households was $81,960. This quintile paid 19.9 percent of federal taxes -- more than the bottom three quintiles combined (0.7, 3.9 and 10.2 percent, respectively). The top quintile (mean income, $141,620) paid 65.1 percent.

Of course the double taxation of money disbursed as dividends -- first as corporate earnings, then as individuals' income -- does influence capital flows. The current system in effect subsidizes corporate financing by debt rather than equity, because interest is deductible and dividends are not.

But the stimulative effect of the president's proposal to eliminate taxation of individuals' dividend income is limited, because half of all dividends go to 401(k)s, pension funds and other untaxed accounts. It would be better to cure double taxation by allowing corporations to expense dividends against income.

It is true that four companies -- Microsoft, Cisco Systems, Dell and Intel -- have among them $80 billion in cash (half of which is Microsoft's). But it is not necessarily true that a change in the taxation of dividends would cause anything like that sum to be distributed to shareholders.

Those four jewels of the information-technology sector must live in wary anticipation of the Next Big Thing, the identity of which is unknown. They must have resources to respond quickly to some technological change that alters the economic landscape as rapidly and radically as one New Thing, the telephone, did in devaluing one of the 19th century's most highly skilled cohorts of professionals -- telegraphers.

Today's "stimulus package" is psychotherapy for a nation that very recently has become too fixated on the stock market, which has declined three consecutive years for the first time since 1939-1941. But the stock market and the economy are not identical, and indeed they have diverged -- the market slump has been more severe than the recent recession, the mildest since 1945.

President Clinton's 1993 push for a stimulus package flowed from candidate Clinton's 1992 claim that the economy was in crisis. Actually, the supposed crisis -- at that point, the mildest recession since 1945 -- had ended before the election: The economy grew at a 3.1 percent annual rate in the third quarter of 1992. Kerrey's stimulus package was more stimulating.